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1.4.1 Production and productivity

Production and Productivity: Not the Same Thing

Definition

Production: the process that turns inputs (the factors of production) into output of goods and services; it refers to the total quantity produced.

Productivity: output per unit of input per period of time, a measure of how efficiently factors such as labour and capital are converted into output.

  1. Production is about the size of output: the total quantity of goods and services made in a period.
  2. The inputs used are the factors of production: land, labour, capital and enterprise.
  3. Productivity is about efficiency: how much output each unit of input generates, not the total.
  4. The two can move apart: adding more workers can raise production while productivity falls, if each extra worker adds less output than those already employed.
Note
  • Rising productivity lowers average costs and so raises competitiveness at home and abroad.

Measuring Productivity: Output per Worker or per Machine

  1. Labour productivity
    1. Output per worker or per hour worked.
  2. Capital productivity
    1. Output per unit of capital employed.
Example
  • A team of 10 workers produces 400 units a week, so labour productivity is 40010=40\dfrac{400}{10} = 4010400​=40 units per worker.
  • If better machines lift output to 480 units with the same 10 workers, productivity rises to 48010=48\dfrac{480}{10} = 4810480​=48 units per worker, a gain of 20%20\%20%.
  • Output (production) rose from 400 to 480 while the labour input stayed fixed, which is precisely why productivity, not just production, increased.

What Raises Productivity: Investment and Skills

  1. Investment in better capital and technology raises output per worker.
  2. Education and training improve the skills of the workforce.
  3. Higher productivity cuts unit costs and improves competitiveness at home and abroad.
Note
  • UK labour productivity has grown unusually slowly since the 2008 financial crisis, a pattern often called the productivity puzzle.
  • Weak business investment and skills shortages are among the causes cited, which helps explain why UK real wages have stagnated for long periods.

Keep Production and Productivity Apart

Exam technique
  • Use production for total output and productivity for output per input.
  • Link a productivity rise to lower average costs, then to competitiveness.
Common Mistake
  • Do not confuse production with productivity.
  • Production is the total, while productivity is output per unit of input.
Self review
  • Define production.
  • Define productivity.
  • Distinguish labour from capital productivity.
  • Why does higher productivity lower average costs?
  • If 8 workers make 240 units, what is labour productivity, and what happens to it if output rises to 320 with the same team?
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Flow diagram of land, labour, capital and enterprise entering a firm, then output, with a comparison showing that higher output does not always mean higher labour productivity Production is the process of turning inputs into outputs. Inputs are resources such as land, labour, capital and enterprise, while outputs are the goods or services a firm produces.

Productivity is not the same as production. Production means total output, but productivity means output per unit of input used.

Economists summarise the idea with a simple ratio.

Productivity=total outputquantity of input used\text{Productivity} = \frac{\text{total output}}{\text{quantity of input used}}Productivity=quantity of input usedtotal output​

The denominator matters because it tells you how many inputs were needed to generate that output.

A firm can produce more simply by hiring more workers or using more machines. Productivity rises only if each worker, hour, or machine is producing more than before.

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What is the economic definition of production?

1.4.1 Production and productivity Revision Guide

  1. A Level
  2. /Economics
  3. /1.4.1 Production and productivity